Solutions to Midterm II, FIN 350, Spring 2011
Form
Answer
Form
Answer
A
B
A
B
1
2
D
14
15
A
2
4
E
15
16
C
3
5
A
16
14
A
4
1
C
17
18
A
5
6
B
18
17
C
6
3
C
19
19
C
7
8
A
20
20
B
8
9
B
21
22
A
9
7
A
22
24
B
10
10
D
23
21
D
11
12
B
24
25
B
12
13
E
25
23
E
13
11
C
26
26
E
Solutions:
1. Solution:
.
FCF model for valuing stock
Answer: d
Firm value = $25,000,000/(0.10 – 0.07) = $833,333,333.
This is the value of the whole company, including debt, preferred stock,
and common stock.
From this, we subtract the $200,000,000 in debt and preferred stock.
This leaves an equity value of
$833,333,333 - $200,000,000 = $633,333,333.
So, the price/share =
000
,
000
,
30
333
,
333
,
633
$
= $21.11.
2.
Preferred stock concepts
Answer: e
MEDIUM
3.
Preferred stock yield
Answer: a
Annual dividend = $0.50(4) = $2.00.
r
p
= D
p
/V
p
= $2.00/$20.00 = 0.10 = 10%.
4.
.
CAPM
Answer: c
MEDIUM
Risk-free rate
7.00%
Old market risk premium
4.00%
New market risk premium
6.00%
Old required return
13.00%
Beta
1.50
New required return
16.00%
5. Standard deviation, historical returns (sample SD)
Answer: b
HARD